Who Pays When Utility Managements Screw Up?

Leonard Hyman & William Tilles

Mon, May 18, 2026 at 3:00 PM EDT 5 min read

Please excuse the infelicitous wording, but that is what this is all about. Not missteps or misjudgments but genuine, massive screw-ups. Policy makers in the United States worked out that problem over time, dealing with nuclear cost overruns and aborted projects. Three utilities went bankrupt (only one being investor-owned) when the financial burdens of nuclear projects far exceeded the resources of the utility. In most cases, regulatory agencies forced utility shareholders to bear some of the losses or imprudently incurred costs, customers paid some of the costs in higher rates, but creditors came out whole.

In the United States, regulatory agencies regulated not only prices, but also watched over utility financial policies, management dealings and quality of service. They did not necessarily tell the utility how to finance, but they often set rates based on how they thought the utility should finance, and heaven help those who ignored that advice. So there was little likelihood that financial misdeeds or self dealing would take place. Furthermore, the companies and the regulators had an implicit deal. The regulator granted the utility a modest profit that did not leave much margin for error or for unanticipated costs. In return, the utility expected the regulator to cover legitimate costs (whether expected or not) through the ratemaking process. The regulator, in effect, told the utility, “We give you a return commensurate with low risk, and we will keep that risk low for your owners and creditors as long as you don’t play any games with us.”

The British, since privatization more than three decades ago, have taken a lighter-handed regulatory approach. They did not like to interfere with ownership questions or how the company financed. That was management’s area of expertise. Companies could make big profits without regulators watching every move. It was like watching those black and white Ealing Studios movies: old Etonian buddies could not possibly be spies for a foreign country, nor do chaps like us not play by the rules.

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Now we come to Thames Water, Britain’s largest water utility, whose fate at the time of this writing is in the hands of the courts.  It seems that the previous owners, a succession of them, stripped cash from the business, replaced equity with debt, spent huge sums on capital expenditures charged to water consumers, and still failed to meet water and sanitation goals. (Where was the regulator? Presumably letting boys be boys.) Well, the result was that Thames Water ran out of funding. The shareholders would not put in more money,  and they were wiped out. Politicians talked about renationalizing the company, but its fate is now in court, where two creditor groups vie to provide the company with billions of pounds of credit at high interest rates (9.75% or 8% depending on which group wins) to keep the company going until its finances are stabilized.